Politicians and many Americans frequently describe Medicare as if it were an investment account: Americans “pay into” the program with their payroll taxes throughout their working lives, and in exchange get benefits when they turn 65. However, this is a misconception for two reasons. First, Medicare is a transfer program from workers to retirees, with current benefits largely being funded by current tax receipts. Second, Medicare beneficiaries over the course of their lifetimes tend to receive more in benefits than they pay in both taxes and premiums. This week’s Paragon Pic shows how lifetime benefits (net of premiums) have far exceeded Medicare taxes for average two-earner households at every point in the program’s history and will continue to do so for the foreseeable future.
This figure is based on annually updated data and calculations from the Urban Institute. Although it only shows two-earner households with average income, this trend holds across various income levels and household types (including individual and married single-earner households).
A two-earner household with average earnings who turned 65 in 2020 is expected to receive $353,000 more in lifetime Medicare benefits than their total tax and premium payments. This is expected to rise to $498,000 for those who turn 65 in 2030.
The rising portion of Americans over 65—a function of the increasing number of elderly and declining birth rates—will further strain the program’s finances. The mismatch between retired and working-age Americans is demonstrated by the decline in the number of workers per Medicare beneficiary—from about four from 1980 through 2008 to 2.9 in 2021 to an expected 2.5 in 2030. The Congressional Budget Office projects that roughly 14 million more people will be over the age of 65 by 2033.
Medicare’s unsustainable financial outlook requires action from policymakers. For example, reducing government subsidies for wealthier Medicare beneficiaries would require them to cover a higher proportion of their benefits and save money for the program.
